Divorce and Estate Planning

Transcription

1 ATTORNEYS AT LAW THE ANDERSEN FIRM A PROFESSIONAL CORPORATION Divorce and Estate Planning South Florida Office West Florida Office Florida Keys Office Tennessee Office New York Office Washington D.C. Office 500 E. Broward Blvd Bee Ridge Rd. 820 Whitehead St. 862 Med Tech Pkwy. 230 Park Ave. 601 PA Ave. NW Suite 1600 Sarasota, FL Key West, FL Suite th Floor Suite 900 South Bldg. Fort Lauderdale, FL Johnson City, TN New York, NY Wash. D.C

2 The Andersen Firm A Professional Corporation IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

3 The Andersen Firm A Professional Corporation Focus in Estate Planning & Administration. Multiple attorneys with Advanced Degrees in Estate Planning and Tax. Business Model focused on serving Financial Advisors and their clients.

4 Reviewing Estate Plans in Connection with Divorce Reviewing / updating estate plan is VERY IMPORTANT, most forget to have estate plans reviewed / updated after divorce. State law may revoke will or certain provisions of will. Review/change former spouse s designation as executor/personal representative, attorney-in-fact, trustee, health-care agent, and any beneficiary designations in retirement plans/life insurance. There may be estate liquidity issues since no more marital deduction. Insurance could be used to cover estate tax The Andersen Firm, A Professional Corporation.

5 Parents Estate Plan as Part of a Marital Settlement Divorce court may consider inheritances when determining property settlements and alimony, unless parents have done proper estate planning. Future/contingent inheritances generally are not reachable in divorce settlements BUT some courts have considered them, unless parents have done proper estate planning. Current interests in trust are generally not reachable if trust has spendthrift provisions but varies depending on jurisdiction.

6 Using Alimony Trusts Objective is to protect recipient spouse and end interaction between spouses. Procedure: 1. Amount of funding negotiated 2. Irrevocable trust pays to recipient spouse Tax Treatment: Recipient spouse taxed on income received

7 Structuring Tax-free Property Settlements: Income Tax Consequences: Provides for income-tax-free property transfers incident to divorce. Lifetime, divorce-motivated property transfers between spouses result in recipient spouse receiving the basis and holding period of transferor spouse.

8 Structuring Tax-free Property Settlements: Gift Tax Consequences: Transfer of cash or property in satisfaction of certain support and property obligations not taxable gifts. Payments of alimony, support for minor child and property settlements made under agreement meeting requirements of 2516 are deemed made for adequate consideration, i.e., not a gift. Transfers made under a court order are also not a gift. Transferee takes transferor s basis and holding period.

9 Structuring Tax-free Property Settlements: 2516 Requirements: Must be a written agreement. Only payments designated and required by the agreement qualify as non-gifts. Agreement must become effective within time period commencing 2 years before divorce and ending 1 year after divorce.

10 Preserving the Maximum Capital Gain Exclusion on the Sale of a Primary Residence in Divorce General Requirements for $250,000 / $500,000 Exclusion: Must be principal residence Owned and Used for 2 of last 5 years. $250,000 exclusion if single, $500,000 if married and filing jointly.

11 Preserving the Maximum Capital Gain Exclusion on the Sale of a Primary Residence in Divorce (cont.) Sell Home Prior to Divorce to get $500,000 Exclusion: Husband and Wife owned and used jointly-owned home for more than 2 of last 5 years. Purchase price $200,000, FMV $700,000 If husband transfers his interest to Wife and she later sells, only $250,000 exclusion. If Husband and Wife sell prior to divorce and file a joint return, $500,000 exclusion.

12 Preserving the Maximum Capital Gain Exclusion on the Sale of a Primary Residence in Divorce (cont.) Imputed Use of Home Spouse owning home treated as using home as principal residence during any period other spouse is granted use of the home under divorce or separation agreement. Husband (who owns home) moves out of home into an apartment. Husband and Wife divorce Wife granted use of home under divorce agreement. Wife s use of home is attributed to Husband. Husband can claim $250,000 exclusion The Andersen Firm, A Professional Corporation.

13 Preserving the Maximum Capital Gain Exclusion on the Sale of a Primary 2012 The Andersen Firm, A Professional Corporation. Residence in Divorce (cont.) Imputed Ownership of Home Spouse who owns home transfers home to other spouse pursuant to divorce, owner-spouse s period of ownership is attributable to the other spouse s ownership. Husband purchases home in his name in Husband and Wife occupy home from Couple divorces in 2004 and Wife gets home under divorce decree. Wife qualifies for $250,000 exclusion as Husbands ownership period is added to her ownership period. Wife satisfies both use and ownership requirement.

14 Handling Stock Options and Deferred Compensation State Law Treatment: Many courts hold that options are a form of income, rather than a form of property. If property, ex-spouse has no future claim to them. If income, options are eligible for alimony and child support computation.

15 Handling Stock Options and Deferred Compensation (cont.) Rev. Rul Held: An employee spouse who transfers interests in nonqualified stock options and nonqualified deferred compensation to his former spouse incident to divorce is not required to include amount in gross income upon the transfer. The former spouse is required to include amount in gross income when the former spouse exercises the stock options or when the deferred compensation is paid or made available to the former spouse

16 Handling Stock Options and Deferred Compensation (cont.) Rev. Rul cont. Stock options and unfunded deferred compensation are property under Entitled to non-recognition treatment under Ruling does not apply to nonqualified stock options, unfunded deferred compensation or other future income rights to the extent such options or rights are unvested at the time of transfer or to the extent they are subject to substantial contingencies at the time of transfer.

17 Handling Stock Options and Deferred Compensation (cont.) Rev. Rul Held: Nonqualified stock options and nonqualified deferred compensation transferred by an employee to a former spouse incident to a divorce are subject to FICA, FUTA and income tax withholding to the same extent as if retained by the employee. Payable at the time the non-employee spouse exercises the options or received payments under the deferred compensation plan, not when they are transferred to the non-employee spouse.

18 Handling Stock Options and Deferred Compensation (cont.) Rev. Rul (cont.) Method of collecting and reporting FICA, FUTA and income tax withholding are dealt with in detail in the ruling (not until non-employee spouse exercises option or receives payment).

19 Retirement Plans and Divorce Qualified Pension Plans (QRPs) QDRO (Qualified Domestic Relations Order) required. A judgment, decree or order pursuant to a state domestic relations law. Provides for spouse to be alternative payees Very Specific Rules. Failure can cause immediate tax and/or jeopardize plan

20 Retirement Plans and Divorce (cont.) Qualified Pension Plans (QRPs) (cont.) Taxation. Spouse taxed on receipt of money from QRP. But 10% early distribution penalty waived. Alternate payee can also roll to own IRA. Individual Retirement Accounts (IRAs). QDROs not required Taxation Transfer on divorce not taxable if pursuant to divorce decree or written agreement. Post-transfer, recipient spouse treated as owner with regular tax treatment and Can name own beneficiary

21 Life Insurance and Divorce Q: Does the divorcing spouse still have an insurable interest? A: Yes, life insurance is often used to protect the income of a spouse providing alimony and/or child support.

22 Life Insurance and Divorce cont. Divorce courts will sometimes require the providing spouse to maintain a life insurance policy that will cover the support payments for however long the payments are supposed to be made. Issue to be discussed is who is to be the owner. Owner has control of the cash value, who is deemed the owner, and beneficiary designations.

23 Severing a Charitable Remainder Trust CRT May Be Split into Two CRTs Tax-free Upon Divorce. One spouse gets a life interest in one CRT and the other spouse gets a life interest in the other CRT with the remainder interest in the trust going to the same charity as the original CRT. Basis and Holding Period of Assets in the CRT Will Be the Same As Before the Division. CRT is Not Split at Divorce. If former spouse is beneficiary after grantor s death, no marital deduction. Value of CRT will be includible in the estate of the deceased grantor. Actuarial value of ex-spouse s interest will be subject to estate tax The Andersen Firm, A Professional Corporation.

24 Minimizing Joint and Several Income Tax Liability Q: Can a Joint Return Be Filed? A: If couple are divorced, legally separated, or the abandoned spouse rules apply, a joint return cannot be filed. Consequences of Filing a Joint Return Liability is joint and several

25 Investment Considerations During Property Settlements Remember liquidation = gain. Example: Total portfolio of marketable securities (all marital assets) = $3 Million. Cost basis = $3 Million $500,000 = husband s company s stock (publicly traded). Basis = $500,000 (No Gain or Loss) $500,000 = husband s stock picking account. Basis of $800,000 $1,000,000 = diversified stock funds held for many years. Basis of $400,000 ($100,000 of the gain is short term) $1,000,000 = bond funds. Basis of $1,000,000 (No Gain or Loss) 2012 The Andersen Firm, A Professional Corporation.

26 Example cont. : Assumptions Husband takes his company stock, his stock picking account and $500,000 of the bonds. Total value is $1,500,000 Total basis is $1,800,000 Loss of $300,000 Tax effect if liquidated: loss may offset other capital gains, and/or $3000 of ordinary income/year Wife takes diversified stock funds and $500,000 of bonds. Total value is $1,500,000 Total basis is $900,000 Gain of $600,000 ($100,000 is short term) Tax effect if liquidated: $500,000 x 15% + $100,000 x 30% = $105,000 Net receipt is then $1,500,000 - $105,000 = $1,395, The Andersen Firm, A Professional Corporation.

27 Conclusion Divorce causes many changes in life, one of which deals with the client's estate plan. Out of all the considerations discussed above, the MOST IMPORTANT is that they have their estate plan reviewed by an attorney and all beneficiary designations reviewed by their financial advisor to ensure that their beneficiaries are properly taken care of and that nothing passes to an unintended beneficiary.

28 Unauthorized Entities: Problem Over the past several years there has been a substantial problem with licensed Florida agents selling unapproved insurance through unauthorized entities Recognizing unauthorized entities Agents failed to recognize that the entities were not licensed insurance companies. The problem has resulted in the loss of hundreds of millions of dollars to Florida residents due to unpaid claims and theft of premiums Solution Agents who sell the lines of insurance that these entities typically offer need to be educated on laws and issues relating to this problem

29 The Financial Advisors Easy 3 Step Process for Estate Planning 1. Call Angela Christian at to set up an appointment for client. 2. Ask client for current estate-planning documents and forward them to The Andersen Firm (optional but very desirable). 3. Ask clients to fill out snapshot questionnaire and forward to The Andersen Firm (optional but very desirable).